Recovery in luxury car markets makes BMW rethink its earnings target

Article by Christian A., on August 29, 2010

BMW AG, considered as the biggest premium carmaker in the world, said that it may have to rethink its earnings target by August. The recovering luxury car markets are being led by China.

For the first quarter, BMW posted a 2.7 percent margin at its automobiles segment after the division's earnings before interest and tax (EBIT) exceeded expectations by 35 percent to reach EUR291 million ($388 million).

The company conducted an inventory clear-out of its old BMW 5-series models before the next generation's European re-launch set in late March. As a result, some analysts were led to incorrectly predict higher incentives in the first quarter, with a resulting drop in profitability. Credit Suisse analyst Arndt Ellinghorst said that BMW is massively restoring pricing.

From the company's latest monthly data, it shows that the discounts per unit in the United States are currently 31 percent below the same level of last year. This is before the new 5 series arrives in the US in June.

Ellinghorst said that the market had been declining, seeing only a 3 percent EBIT margin at BMW's automobiles segment according to a Reuters poll. As a result, he stayed with his forecast for 4.1 percent this year.

According to Ellinghorst, if BMW has a global record of 2,000-3,000 dollar -or euro- better transaction price per vehicle, then it should be considered a huge tailwind for these guys. He estimates that under these circumstances, it's possible for BMW to add almost EUR3.5 billion in earnings on sales of 1.35 million vehicles.

BMW got half a billion euros in group pretax profit, successfully achieving its 2010 target only three months into the year by considerably surpassing last year's figure. CEO Norbert Reithofer and finance chief Friedrich Eichiner have to clarify why the company, which provided a conservative forecast with only two weeks still to go in the quarter, had failed to give new guidance like Daimler.

In 2009, BMW reported a profit before financial result of around EUR289 million, compared to EUR921 million in 2008, for a huge drop of 68.6 percent. Profit before tax surged 17.7 percent to EUR413 million. However, BMW saw its net profit drop from EUR330 million in 2008 to just EUR210 million in 2009.

BMW blamed the global economic and financial crisis for its financial decline in 2008. It noted that the steep decline in demand on key sales markets as well as unfavorable refinancing conditions heavily impacted the carmaker’s results, especially in the first half of 2009.

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Topics: bmw, sales

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